What can international climate treaties do (and not do) actually?

The last few Conferences of the Parties COP have resulted in impasse among the developed and developing countries. Notably the less developing countries highlighted common but differentiated responsibilities amongst the developed countries on carbon dioxide emissions. Whilst developing countries acknowledged the need to curb their carbon dioxide emissions, they also emphasised that it was the economic and industrial development of the developed countries that have brought emissions to its present high level. Developing countries (including the likes of China and India) would not sacrifice the economic development and well being of its populace to reduce carbon emissions. On the other hand, developed countries highlighted the growing emissions of the developing nations (China is now the biggest emitter in the world). Whilst Europe is willing to go it alone, the same commitment cannot be said of other developed countries. Notably the USA would not go agree to any legally binding target without the participation of the developing countries.

Legally binding targets: the be all and end all?

That makes legally binding targets and enforcement – a key objective of international treaties hard to achieve. Negotiations lumbered on with the last COP 17 in Durban hailed as a breakthrough just for a ‘roadmap’ to an agreement in 2015. The difficulties are obvious – the recent EU unilateral move on an airlines tax on carbon emissions invoked threats of trade war and retaliation by China, India, Russia and the USA, with the latter even commenting that it was an infringement on their ‘sovereignty’. Given the nations do not even agree to economic payments of ~$10 million, how likely they will agree on more holistic international agreements?

In an ideal scenario, the international treaties sought to achieve legally binding caps on carbon emissions amongst the nations. These caps would preferably be linked via a global cap and trade agreement as a carrot and stick incentive for nations to reduce their emissions. The objective of a global market for a cap and trade is to assign a price on carbon and thence incentivise carbon abatement programs like renewable energies and carbon sequestration and storage (CCS). Much contention arises on the level of cap for each nation. Too low a level and at which base year would impede its economic growth.

This makes it difficult for carbon intensive countries like Canada to agree to binding agreements. Canada with its vast resources of heavily pollutive tar sands has already backed out of the Kyoto Protocol it originally was a signatory to. Other countries like Venezuela (Orinco heavy oils) and OPEC would have found it equally hard on any agreement. Even Japan with the recent closure of its nuclear plants in exchange for fossil fuels generation will find it hard to replace them in time with renewable energies to meet targets.

Market economics and technological drivers:

What international treaties fail to achieve – that of an equitable carbon price and incentives for carbon abatement projects and development are already been driven at national levels and on bilateral agreement levels. This is more the result of corporate entrepreneurship in response to rising oil prices than environmental conscientious governments. The EU ETS – a result of the multi-lateral Kyoto Protocol has seen its carbon price fell to a record low of €6.05 in early April 2012. This was the combination of record corporate investment into renewable energy generation and warm weather that caused an over-allocation of EUAs – a flaw of the cap and trade system that artificially assigns emissions permit quota. Present political discourse is ongoing to reduce the emissions quota so has to increase the EUA price. A higher carbon price is needed to send a strong signal to companies to invest in costlier carbon abatement technologies.

A cost-benefits study of climate change policies recommends a carbon price that slowly increases through the next decade. An initial low price would enable it to pick low-lying fruits (of low marginal abatement benefits). This is increased through the 2020s when more advanced abatement technologies become more economically feasible. A too high an initial price set would create large opportunity costs to other measures of social and economic welfare.

Recent technological advances and economies of scale have however made in some cases –carbon abatement technologies competitive. For example, onshore wind generation in some cases have reached grid parity. Solar PV generation costs have also been drastically reduced and projected by experts to be competitive with conventional electricity by 2015. Generally, on levelised costs of generating electricity basis, onshore generation of electricity costs between $70-225/ MWh. Solar PV electricity costs $200-$300/MWh. Coal generation and gas-fired levelised costs of electricity have cost between $40-$120/ MWh depending on the costs of fuel. See the 2010 IEA electricity generation costs by fuel. Over the past decade, renewable generation of electricity have benefited from subsidies and feed-in tariffs, which provided it initial consumer acceptance and lower costs. It is a victim of its own success now with a cut of the solar installation subsidy in Germany by as much as 29% from 1 Apr ’12 while the tax breaks for wind manufacturers in USA may not be extended beyond end of this year.

Other economic factors are at work in growing renewable generation. With spiralling growth in fuel consumption due to a youthful population, many Middle East countries have seen its crude export volumes drop. Notably Saudi Arabia saw its crude consumption increase from 1.2 in 2001 to 2.6 mb/d in 2011. Several Middle East countries still use expensive fuel oil/ crude oil for electricity generation. If this trend continues, Saudi Arabia may even turn to be a net importer of crude oil however unlikely it is in 2035. The Middle East governments recognise this and are building wind farms and exploiting its sunny conditions for solar power. A recent growth spurt has seen Abu Dhabi establishing Masdar city – an envisioned zero emissions city. See the article Middle East countries have reasons to back renewable energies. Other countries like Egypt and UAE are taking marginal steps towards non- fossil fuels generation (including nuclear generation). Another key reason that OPEC countries are backing renewable energies is that oil is still expected to retain its place as a main primary energy supplier till 2030s as assured by all outlook reports by IEA, BP and Shell.

What incremental benefits of international treaties?

Given the inexorable costs reduction of renewable technologies and its deployment, what will be the incremental benefits of legally binding emissions targets and the artificial market conditions created by international treaties ? It will hasten the development of certain backstop technologies -in particular carbon sequestration and storage (CCS). The CCS has been recognised by IEA as a lever technology to lower world carbon dioxide emissions from 2020s. An estimated carbon cost of €40-50 per tonne will make it economically feasible now, when present price is only €6. However, existing CCS technology is still at a research stage for fixed electricity installations. The only economic use of CCS is in enhanced oil recovery (EOR). The World Coal Association updates a current map of CCS projects.

Another backstop technology that may be promoted is electric vehicles – notwithstanding technologies/ measures like – solar, wind, hydro, geothermal, biomass and energy efficiency programs that are already growing without multi-lateral treaties. Electric vehicles however source their power from power generation facilities. Only if the latter power is from renewable generation will carbon emissions be reduced. Further, due to existing vehicle life span – only 20 million electric vehicles (source IEA) out of 1 billion vehicles is expected to be on the roads. This may reduce an estimated 0.2 Gt of total 30 Gt annual emissions (with transportation contributing ~30% emissions) – not much incremental benefit.